Question

This year, Major Healy paid $35,500 of interest on a mortgage on his home (he borrowed $710,000 to buy the residence in 2015; $810,000 original purchase price and value at purchase), $5,500 of interest on a $110,000 home equity loan on his home (loan proceeds were used to buy antique cars), and $8,000 of interest on a mortgage on his vacation home (borrowed $160,000 to purchase the home in 2010; home purchased for $400,000). Major Healy’s AGI is $220,000. How much interest expense can Major Healy deduct as an itemized deduction?

Interest Deductible:

Answer 1

First off, we're going to assume that 'This year' referred in the question is 2018 and the new tax rules are going to apply.

Now, let's start with the interest on the Home equity loan he took out.Since the date is not mentioned,let's assume he took it out this year.

The use to which the proceeds of the home equity loan is put,decides the amount of interest which is deductible.If the proceeds are used to buy,build,or substantially improve the tax-payer's home,Then the interest would be deductible.If the proceeds were used to pay for personal expenses,like credit card debts or paying off student loans,then the interest would not be deductible.

The proceeds of the loan were used to fund his purchase of antique cars,which falls under the 'personal use' category.Because of that, the interest paid on the home-equity loan is not deductible.

Now,the mortgage loan on his home(main residence) and his vacation home.Since,both were purchased before 15 Decemeber 2017,the old tax rules and limits still apply for these loans.

The lower dollar limit for qualifying mortgage debt is $1million( $750,000 in 2018).What that means is that the interest on only upto $1,000,000 qualified residence loans is deductible.

The total qualified residence loan would be= $710,000(home)+$160,000(vacation home)

                                                             =$870,000

$870,000 does not cross the threshold of $1000,000.Therefore, the interest paid on both the loans are deductible

                       Amount of interest that can be deducted=35,500+8000

                                                                                   =$43,500